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  <h1>Changes to a contract</h1>

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  <p>Is the design change applicable to <span class="highlight">existing policies</span>, or just new ones? How to <span class="highlight">disclose the change to the customer?</span>
    If the change involves a new partner, will there be an issue of reputation? Economies of scale?<p>
  <p>Whenever you are talking about expenses, you need to specify the types of expense you talk about</p>
  <ul>
    <li> initial commission
    </li>
    <li> administration cost
    </li>
    <li> customer acquisition cost
    </li>
    <li> claim handling / claim investigating expense
    </li>
    <li> customer acquisition cost
    </li>
    <li> increase in disputed claims (maybe)
    </li>
  </ul>
  <p>If the contract is simple, the following advantages are obtained</p>
  <ul>
    <li> the design is more transparent, thus policyholders are likely to find it easier to understand
    </li>
    <li> It will also be easy for the sales agents/other sales channels to explain to potential customers
    </li>
    <li> The additional literature that would be required to explain the concept etc will no longer be required, making marketing and sales literature more streamlined and customer friendly
    </li>
    <li>
      The reputational risk is minimized
    </li>
  </ul>

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    Reasons for changes
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      <ul>
        <li>current products are unprofitable
        </li>
        <li>business volumes are low.
        </li>
        <li>changes in legislation open new opportunities
        </li>
        <li>changes in legislation require re-design of existing products
        </li>
        <li>new products launched by competitors.
        </li>
      </ul>
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    From product design point of view
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      <ul>
        <li>Profitability
          <br>
          The company MUST ensure that the premiums charged will be
          sufficient to cover the benefits to be provided and the expenses
          incurred in most foreseeable circumstances and to provide an
          appropriate return on capital.
        </li>
        <li>Marketability
          <br>
          Clearly, the product offered needs to be attractive to participants
          in the markets in which it will be sold.
          <br>
          <span class="highlight">How many conditions need to be fulfilled before the benefit is paid!</span>
          <br>
          How to increase the marketability: offer options, guarantees, services
        </li>
        <li>Competitiveness
          <br>
          For most insurance products, the main factor affecting the competitiveness will be the relative level of premium.
          <br>
          Distribution channels are also of great importance.
          <br>
          For WP or UL, the past bonus rates / past invesetment performance are more important.
          <br>
          Other factors: reputation, brand recognition, large excess, limitations imposed by the policy, full premiums is required
          to be paid upfront.
        </li>
        <li>Capital requirements
          <br>
          Initial capital strain: initial expenses (such as commission and underwriting) plus statutory reserve required to be set up will usually exceed initial premium received.
          <br>
          In practice, a life insurance company will aim to design a product
          so that the initial capital strain is kept to a minimum.
          <br>
          Main methods:
          <ul>
            <li>minimising initial expenses
            </li>
            <li>minimising statutory solvency requirements
            </li>
          </ul>
        </li>
        <li>Cross-subsidy
          <br>
          <ul>
            <li>cross-subsidy between low and high premium contracts. Expense loading is proportional to the premiums.
            </li>
            <li>
              between different distribution channels
            </li>
            <li>
              between different types of product
              <br>
              If the same premium is applied to all distribution channels.
              <br>
              higher premiums may be charged for less price-sensitive
              products to enable more competitive premiums to be
              charged for other products
            </li>
            <li>
              between new business and renewals
              <br>
              as a result of lower administration costs for renewals
            </li>
          </ul>
        </li>
        <li>Sensitivity
          <br>
          The company should aim to ensure that the sensitivity of future
          profits to variations in future experience is minimised.
          <br>
          In life insurance, the main methods to assist here are:
          <ul>
            <li>
              match asset proceeds and benefit outgo as closely as possible with regard to nature, timing and currency
            </li>
            <li>
              match charges accruing and expenses incurred as closely as possible with regard to nature and timing
            </li>
          </ul>
        </li>
        <li>Risk characteristics
          <br>
          Consideration must also be given to the level of risk associated
          with a proposed contract design. In particular, the company must
          consider whether or not to absorb the risks internally.
        </li>
        <li>Guarantees and options
          <br>
          The actuary will also need to consider the onerousness of any
          guarantees and options included in the product design.
          <br>
          Guarantees and options offered may relate to:
          <ul>
            <li> investment return on non-profit life insurance business
            </li>
            <li> mortality on term assurance and whole life contracts
            </li>
            <li>fixed expenses over the term of a contract
            </li>
            <li> surrender values
            </li>
            <li>renewability or convertibility options in life insurance contracts
            </li>
            <li> conversion terms for guaranteed annuity contracts
            </li>
            <li> indexation of pensions in payment
            </li>
          </ul>
          The main problems caused by offering such guarantees are:
          <ul>
            <li>the possibility that unfavourable future experience will give rise to an unexpected loss, and
            </li>
            <li> the requirement to reserve for this possibility from the outset, thereby increasing the capital strain
            </li>
          </ul>
        </li>
        <li>Administration systems
          <br>
          In practice, the contract design is limited by the administration
          systems of the company. Thus, the cost of enhancing
          administration systems to cope with new elements of product
          design must be weighed against the additional profits expected.
          <br>
          <span class="highlight">
          In addition, simplicity of design is likely to be an advantage for
          non-technical staff, sales force, brokers and policyholders.
        </span>
        </li>
        <li>Consistency
          <br>
          Companies often try to ensure that the design of a new product is consistent with the existing product base.
          <br>
          Consistent with the providers' risk profile and risk appetite
        </li>
      </ul>
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    From external environment
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      <ul>
        <li> Regulation: may intervene, put pressure on the company to review
        </li>
        <li>Public interest: the regulator may want the company to prioritize the interests of policyholders and the public as a whole.
        </li>
        <li>Tax regime
        </li>
        <li>Economic outlook
        </li>
        <li>Reputation
        </li>
        <li>Privacy issue
        </li>
      </ul>

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    Others
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      <ul>
        <li>Availability of data
        </li>
        <li>How does it affect expense? Initial expense, renewal expense, claim expense
        </li>
        <li>How does the policyholder perceive this change? What’s their reasonable expectation?
        </li>
        <li>Will they change their behaviour?
        </li>
        <li>Will it boost the sales of other contracts?
        </li>
      </ul>
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    Conflicts of design objectives
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      <ul>
        <li> Simlicity and risk appetite: if using cross subsidy, the policy may be complex but with lower risk.
        </li>
        <li>
          Pprofitability versus marketablity
        </li>
        <li>
          Marketablity versus risk
        </li>
      </ul>
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  <p> Author: Mengke, Lyu</p>

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